Real options games between two competitors: the case of price war
by Elżbieta Rychłowska-Musiał
International Journal of Computational Economics and Econometrics (IJCEE), Vol. 10, No. 1, 2020

Abstract: This paper takes the subject of optimal investment strategies for firms acting on a competitive market. An investment decision-making process is described as a game between two players, and the real options approach is used to find a value of an investment project, therefore the paper falls in the area of the real options games. Based on games solutions we formulate recommendations for competitors. It comes as no surprise that the advantage is primarily on the side of a dominant company, but under certain circumstances, a weaker party has a very strong bargaining chip. To mitigate possible effects of price war, firms may cooperate and their negotiations could be supported by a payoff transfer computed as the coco value. It also turned out that the possible cooperation between competitors gains significance when a project risk is high, as well as when the price war is cut-throat.

Online publication date: Fri, 20-Dec-2019

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